Key Takeaways
- The CFPB's 2020 final rule revoked ability-to-repay requirements from the 2017 Obama-era payday loan regulations.
- Without affordability verification, 12 million Americans face exposure to payday loans with nearly 400% APR.
- Payday loan debt settlement can help borrowers escape cycles of high-interest debt and stop aggressive collection practices.
- Professional settlement companies can negotiate to reduce debt by up to 50% and protect your credit score.
The Consumer Financial Protection Bureau (CFPB) issued a final update in new payday loan rules on July 7, 2020, imposing new limits on payday lending and revoking provisions established during the Obama-era. The original payday loan rules were designed to restrict lenders who disproportionately targeted low-income borrowers with high-interest payday loans, requiring lenders to ensure a borrower's affordability before offering another loan.
However, this protection was short-lived. The CFPB began rolling back these rules in February 2019 when Director Kathleen Kraninger announced plans to revoke the main provision requiring payday lenders to analyze a borrower's affordability—including income, rent, and student loan payments—before granting loans to low-income borrowers. The bureau explained this would increase "access to credit and competition in states that have determined it is in their residents' interests to use such products."
In July 2020, under new leadership, the CFPB released its final rule regarding payday and certain high-cost installment loans, eliminating the requirement for lenders to verify borrowers' ability to pay off loans. The bureau stated this ensures "consumers have access to credit and competition in states that have decided to allow their residents to use such products, subject to state-law limitations."
Importantly, the CFPB maintained restrictions preventing payday lenders from collecting payments directly from borrowers' bank accounts without proper authorization. This protection addresses the common practice where unexpected withdrawals lead to overdraft fees and credit score damage.
Summary of the CFPB Rule
On November 17, 2017, the Bureau published a final rule (2017 Final Rule) establishing consumer protection regulations for payday loans, vehicle title loans, and certain high-cost installment loans. The 2017 Final Rule addressed two discrete topics:
Two Main Components:
- Mandatory Underwriting Provisions: Requirements for underwriting covered short-term and longer-term balloon-payment loans, including payday and vehicle title loans, with related recordkeeping and reporting requirements.
- Payment Provisions: Requirements and limitations regarding attempts to withdraw payments from consumers' checking or other accounts, applicable to the same loans plus certain high-cost installment loans.
The Rule became effective on January 16, 2018, with most provisions having a compliance date of August 19, 2019. However, on February 14, 2019, the Bureau published a notice of proposed rulemaking (2019 NPRM) to revoke the Mandatory Underwriting Provisions. Importantly, the 2019 NPRM did not propose to amend the Payment Provisions.
What Was Revoked:
The Bureau finalized amendments to revoke several key provisions:
- • The "identification" provision stating it's unfair and abusive for lenders to make covered loans without determining consumers' ability to repay
- • The "prevention" provision establishing specific underwriting requirements
- • The "principal step-down exemption" provision for certain short-term loans
- • The "furnishing" provisions requiring lenders to report to registered information systems
- • Related recordkeeping and compliance date provisions
Why This CFPB Payday Loan Final Rule Can Be Problematic
Consumer advocates and Democrats declared that the Trump administration deliberately wiped out essential protections for vulnerable borrowers during the global pandemic and recession. The timing and implications of these changes have sparked significant controversy.
"By eliminating the ability-to-repay protections, the CFPB is making a grave error that leaves the 12 million Americans who use payday loans every year exposed to unaffordable payments at annual interest rates that average nearly 400%."
— Alex Horowitz, Senior Research Officer, Pew Charitable Trusts' Consumer Finance Project
The Crisis Context
The new payday loan rules were declared when consumers were desperately searching for credit. According to the Financial Health Network's 2020 U.S. Financial Health Pulse survey (April 20-May 7, 2020), approximately one out of three Americans lost their jobs due to the COVID-19 pandemic.
Payday Loan Usage Statistics:
- • Nearly 12 million people annually opt for payday loans to pay necessities like rent, utilities, and credit card bills
- • Single parents and low-income individuals are highly dependent on such loans
- • 3% of consumers who lost jobs borrowed via payday loans, deposit advances, or pawn shop loans
- • 16% of financially distressed people sold belongings to get money
- • 12% borrowed from payday loan lenders or similar sources
The Payday Loan Trap
Borrowers can get payday loans easily by walking to a lender with minimal documentation: a valid ID, proof of income, and a bank account. Unlike mortgages or auto loans, payday lending requires no collateral and very little paperwork.
Most lenders provide payday loans with a "finance charge" (service fees and interest) that borrowers must pay upfront. The average APR on a payday loan is about 400%. Lenders justify these high rates by claiming the loans are risky to finance and difficult to recover.
The Debt Cycle:
Loan balances are typically due in two weeks (next payday). Most borrowers can't pay back the entire amount with interest within 14 days, so interest is charged again on the net value (principal + interest).
Gradually, the payday loan debt reaches a limit where it becomes nearly impossible to pay for a borrower already in financial crisis.
Without lenders verifying affordability before providing payday loans, borrowers might take out amounts they cannot repay, ending up in a destructive cycle of borrowing and accumulating debt.
"Any kind of loosening of regulation during this pandemic, specifically around this COVID-19 crisis, is just really, really hard to swallow, knowing that people are struggling financially. It feels like this rule has kind of opened the door for things to become even worse for a lot of consumers."
— Charla Rios, Researcher, Center for Responsible Lending
State Regulation Varies: It's now up to each state to decide whether and how to regulate payday lenders. As of now, 32 states have permitted payday lending, while 18 states and the District of Columbia have either banned them entirely or capped interest rates.
When to Opt for Payday Loan Settlement
If you're a borrower with payday loan debts and can't afford to pay them, you may encounter several challenging situations that require immediate action:
Common Payday Loan Debt Situations:
- • Money withdrawals from your bank account directly or aggressive collection calls from lenders
- • Receiving threats from lenders or collection agencies that you'll be dragged into court
- • Receiving settlement offers on payday loans from the lender
- • Receiving court summons for unpaid payday loan debts
To deal with these situations, the best option is to search for reputable payday loan settlement companies and select the best one to help settle your debts professionally.
When You Should Opt for Payday Loan Settlement:
- If you can't afford to make payday loan payments and want to reduce your payday loan debt burden
- If you want to stop lenders from withdrawing money from your account or stop ACH debits
- If you want to stop harassing debt collection calls that disrupt your daily life
- If you want to grab a lucrative settlement offer and save money on your total debt amount
Getting Help from Settlement Companies
DIY Settlement vs. Professional Help
If you decide to handle your finances and initiate payday loan debt settlement on your own, you'll have no support or professional advice to guide you through the process. Since it will be your first time negotiating with lenders, there are risks:
Risks of DIY Settlement:
- • No professional support or guidance through the complex settlement process
- • First-time negotiation disadvantage against experienced lenders
- • Lenders may confuse you with payday loan state laws and industry rules
- • Cunning negotiation tactics could leave you with unfavorable terms
- • You might end up with nothing in your pocket or worse terms
Benefits of Professional Settlement Companies
When you get help from a reputable company that specializes in payday loan debt settlement, the benefits are significant:
What Professional Companies Provide:
- Complete Information: All details about settling your debts and navigating the process successfully
- Program Enrollment: Sign up for a structured program designed to help you get out of payday loan debt quickly
- Direct Negotiation: The company deals with your payday loan accounts and negotiates directly with lenders
- Collection Call Reduction: Professional intervention reduces abusive and harassing collection calls
- Maximum Savings: Expert negotiators help you settle payday loans with the most savings possible
Choosing the Best Settlement Offer
As a borrower, you must choose the right settlement offer to get the most benefit and save more money. Not all settlement offers are created equal, and some may actually harm your financial situation rather than help it.
Key Points for Choosing the Best Settlement Offer:
No Additional Finance Charges
You should not be paying any additional finance charges beyond the settled amount. Any offer requiring extra fees should be carefully scrutinized.
Significant Debt Reduction
The settlement amount is usually 50% less than what you owe. This represents substantial savings on your total debt burden.
Credit Report Protection
The lender agrees to settle the account as "Paid in full" or "Paid as agreed" in your credit report, ensuring your credit score remains intact.
Red Flags - Reject Settlement Offers If:
- • You're not getting a written settlement agreement letter documenting all terms
- • The settlement company doesn't follow FTC laws and regulations
- • You cannot afford the new payoff amount being proposed
- • The offer includes hidden fees or charges not disclosed upfront
- • The company makes unrealistic promises or guarantees
Conclusion
According to the CFPB payday loan final rule, borrowers may find it difficult to afford high-interest payday loans. However, borrowers can manage this situation by getting help from a non-profit payday loan settlement company and settle their debts once and for all. Remember that all settlement offers aren't beneficial—consider your affordability for the new payoff amount and ensure all agreements are in writing and comply with FTC laws.
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Phil Bradford
Financial Writer & Debt Settlement Expert
Phil Bradford is a financial writer specializing in payday loan debt relief, CFPB regulations, and consumer protection in lending. With deep knowledge of payday lending practices and debt settlement strategies, he helps borrowers understand their options for escaping high-interest debt cycles. His work focuses on educating consumers about their rights under federal regulations and connecting them with legitimate settlement solutions that can reduce debt burdens while protecting credit scores.